RWE Credit-Default Swaps Jump on Plan to Raise 2 Billion Euros

By Abigail Moses and Shelley Smith

Nov. 12 (Bloomberg) -- The cost of protecting RWE AG debt from default rose close to an eight-month high after bankers said Germany's second-biggest utility plans to raise 2 billion euros ($2.52 billion) in a bond sale.

Credit-default swaps on RWE, which posted a fivefold jump in third-quarter profit this week, jumped 10 basis points to 75, according to CMA Datavision prices at 11 a.m. in London. The contracts rise as perceptions of credit quality deteriorate.

RWE may pay a yield of between 220 and 230 basis points more than the benchmark mid-swap rate on five-year notes and as much as 270 basis points on 10-year securities, said a banker involved in the deal. That compares with a spread of 35 basis points when the Essen, Germany-based company last sold bonds in 2004.

``Anytime a company puts out new supply, spreads will widen because the new debt comes at discount,'' said Richard Birrer, a London-based credit analyst at BNP Paribas SA. ``In the current environment spreads may widen more than usual, even for solid A rated companies like RWE.''

Moody's Investors Service will rank the debt at A1, its fifth-highest investment-grade rating. Standard & Poor's will grade the debt one level lower at A, said the banker, who declined to be identified because the sale isn't complete. Barclays Capital, Calyon, Deutsche Bank AG and UniCredit SpA will manage the sale for RWE, the banker said.

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

Crossover Index

The cost of default protection on European corporate bonds rose today as the Bank of England predicted the U.K. economy will contract throughout most of 2009 and inflation will slow below the government's 1 percent minimum unless it cuts interest rates further.

Credit-default swaps on the benchmark Markit iTraxx Crossover Index of 50 companies with mostly high-risk, high-yield credit ratings increased 20 basis points to 815, according to JPMorgan Chase & Co. prices at 10:44 a.m. in London.

The Markit iTraxx Europe index of 125 companies with investment-grade ratings climbed 3 basis points to 150, JPMorgan prices show.

A basis point on a credit-default swap contract protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year.

To contact the reporter on this story: Abigail Moses in London Amoses5@bloomberg.netShelley Smith in London at ssmith118@bloomberg.net